§ 1240.37 - Cleared transactions.

§ 1240.37 Cleared transactions.

Cross Reference

Link to an amendment published at 88 FR 83481, Nov. 30, 2023.

(a) General requirements —

(1) Clearing member clients. An Enterprise that is a clearing member client must use the methodologies described in paragraph (b) of this section to calculate risk-weighted assets for a cleared transaction.

(2) Clearing members. An Enterprise that is a clearing member must use the methodologies described in paragraph (c) of this section to calculate its risk-weighted assets for a cleared transaction and paragraph (db) of this section to calculate its risk-weighted assets for its default fund contribution to a CCP.

(b) Clearing member client EnterpriseEnterprises —

(1) Risk-weighted assets for cleared transactions.

(i) To determine the risk-weighted asset amount for a cleared transaction, an Enterprise that is a clearing member client must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (b)(2) of this section, by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (b)(3) of this section.

(ii) A clearing member client Enterprise's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.

(2) Trade exposure amount.

(i) For a cleared transaction that is either a derivative contract or a netting set of derivative contracts, the trade exposure amount equals :

(A) The exposure amount

the EAD for the derivative contract or netting set of derivative contracts

,

calculated using the methodology used to calculate

exposure amount

EAD for

OTC

derivative contracts

under

set forth in § 1240.36

; plus

(

B

c)

The

, plus the fair value of the collateral posted by the clearing member client Enterprise and held by the CCP

,

or a clearing member

, or custodian

in a manner that is not bankruptcy remote.

(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, the trade exposure amount equals :

(A) The exposure amount

the EAD for the repo-style transaction calculated using the

methodologies under

methodology set forth in § 1240.39(

c

b)

; plus

(

B) The

2) or (3), plus the fair value of the collateral posted by the clearing member client Enterprise and held by the CCP

,

or a clearing member

, or custodian

in a manner that is not bankruptcy remote.

(3) Cleared transaction risk weights.

(i) For a cleared transaction with a QCCP, a clearing member client Enterprise must apply a risk weight of:

(A) 2 percent if the collateral posted by the Enterprise to the QCCP or clearing member is subject to an arrangement that prevents any losses loss to the clearing member client Enterprise due to the joint default or a concurrent insolvency, liquidation, or receivership proceeding of the clearing member and any other clearing member clients of the clearing member; and the clearing member client Enterprise has conducted sufficient legal review to conclude with a well-founded basis (and maintains sufficient written documentation of that legal review) that in the event of a legal challenge (including one resulting from an event of default or from liquidation, insolvency, or receivership proceedings) the relevant court and administrative authorities would find the arrangements to be legal, valid, binding, and enforceable under the law of the relevant jurisdictions; or .

(B) 4 percent, if the requirements of § 1240.37paragraph (b)(3)(i)(A) of this section are not met.

(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member client Enterprise must apply the risk weight appropriate for applicable to the CCP according to under this subpart D.

(4) Collateral.

(i) Notwithstanding any other requirements in requirement of this section, collateral posted by a clearing member client Enterprise that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.

(ii) A clearing member client Enterprise must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member , or a custodian in connection with a cleared transaction in accordance with the requirements under this subpart D, as applicable.

(c) Clearing member EnterprisesEnterprise —

(1) Risk-weighted assets for cleared transactions.

(i) To determine the risk-weighted asset amount for a cleared transaction, a clearing member Enterprise must multiply the trade exposure amount for the cleared transaction, calculated in accordance with paragraph (c)(2) of this section , by the risk weight appropriate for the cleared transaction, determined in accordance with paragraph (c)(3) of this section.

(ii) A clearing member Enterprise's total risk-weighted assets for cleared transactions is the sum of the risk-weighted asset amounts for all of its cleared transactions.

(2) Trade exposure amount. A clearing member Enterprise must calculate its trade exposure amount for a cleared transaction as follows:

(i) For a cleared transaction that is either a derivative contract or a netting set of derivative contracts, the trade exposure amount equals :

(A) The exposure amount for the derivative contract,

the EAD calculated using the methodology used to calculate

exposure amount

EAD for

OTC

derivative contracts

under

set forth in § 1240.36

; plus

(

B

c)

The

, plus the fair value of the collateral posted by the clearing member Enterprise and held by the CCP in a manner that is not bankruptcy remote.

(ii) For a cleared transaction that is a repo-style transaction or netting set of repo-style transactions, trade exposure amount equals :

(A) The exposure amount for repo-style transactions calculated using methodologies

the EAD calculated under § 1240.39(

c

b)

; plus

(

B) The

2) or (3), plus the fair value of the collateral posted by the clearing member Enterprise and held by the CCP in a manner that is not bankruptcy remote.

(3) Cleared transaction risk weightweights.

(i) A clearing member Enterprise must apply a risk weight of 2 percent to the trade exposure amount for a cleared transaction with a QCCP.

(ii) For a cleared transaction with a CCP that is not a QCCP, a clearing member Enterprise must apply the risk weight appropriate for applicable to the CCP according to this subpart D.

(iii) Notwithstanding paragraphs (c)(3)(i) and (ii) of this section, a clearing member Enterprise may apply a risk weight of zero percent to the trade exposure amount for a cleared transaction with a CCP QCCP where the clearing member Enterprise is acting as a financial intermediary on behalf of a clearing member client, the transaction offsets another transaction that satisfies the requirements set forth in § 1240.3(a), and the clearing member Enterprise is not obligated to reimburse the clearing member client in the event of the CCP QCCP default.

(4) Collateral.

(i) Notwithstanding any other requirement in of this section, collateral posted by a clearing member Enterprise that is held by a custodian (in its capacity as a custodian) in a manner that is bankruptcy remote from the CCP, clearing member, and other clearing member clients of the clearing member, is not subject to a capital requirement under this section.

(ii) A clearing member Enterprise must calculate a risk-weighted asset amount for any collateral provided to a CCP, clearing member , or a custodian in connection with a cleared transaction in accordance with requirements under this subpart D.

(d) Default fund contributions —

(1) General requirement. A clearing member Enterprise must determine the risk-weighted asset amount for a default fund contribution to a CCP at least quarterly, or more frequently if, in the opinion of the Enterprise or FHFA, there is a material change in the financial condition of the CCP.

(2) Risk-weighted asset amount for default fund contributions to non-qualifying nonqualifying CCPs. A clearing member Enterprise's risk-weighted asset amount for default fund contributions to CCPs that are not QCCPs equals the sum of such default fund contributions multiplied by 1,250 percent, or an amount determined by FHFA, based on factors such as size, structure, and membership characteristics of the CCP and riskiness of its transactions, in cases where such default fund contributions may be unlimited.

(3) Risk-weighted asset amount for default fund contributions to QCCPs. A clearing member Enterprise's risk-weighted asset amount for default fund contributions to QCCPs equals the sum of its capital requirement, K_CM for each QCCP, as calculated under the methodology set forth in paragraphs paragraph (d)(3)(i) through (iii) 4) of this section (Method 1), multiplied by 1,250 percent or in paragraphs (d)(3)(iv) of this section (Method 2).

(i) Method 1. The hypothetical capital requirement of

12.5.

(4) Capital requirement for default fund contributions to a QCCP. A clearing member Enterprise's capital requirement for its default fund contribution to a QCCP (K

_CCP

_CM)

equals

is equal to:

Where:

(

A) EBRM_i = the exposure amount for each transaction cleared through the QCCP by clearing member i, calculated in accordance with § 1240.36 for OTC derivative contracts and § 1240.39(c)(2) for repo-style transactions, provided that:

(1) For purposes of this section, in calculating the exposure amount the Enterprise may replace the formula provided in § 1240.36(b)(2)(ii) with the following: Anet = (0.15 × Agross) + (0.85 × NGR × Agross); and

(2) For option derivative contracts that are cleared transactions, the PFE described in § 1240.36(b)(1)(ii) must be adjusted by multiplying the notional principal amount of the derivative contract by the appropriate conversion factor in Table 1 to paragraph (b)(1)(ii)(E) of § 1240.36 and the absolute value of the option's delta, that is, the ratio of the change in the value of the derivative contract to the corresponding change in the price of the underlying asset.

(3) For repo-style transactions, when applying § 1240.39(c)(2), the Enterprise must use the methodology in § 1240.39(c)(3);

(B) VM_i = any collateral posted by clearing member i to the QCCP that it is entitled to receive from the QCCP, but has not yet received, and any collateral that the QCCP has actually received from clearing member i;

(C) IM_i = the collateral posted as initial margin by clearing member i to the QCCP;

(D) DF_i = the funded portion of clearing member i's default fund contribution that will be applied to reduce the QCCP's loss upon a default by clearing member i;

(E) RW = 20 percent, except when FHFA has determined that a higher risk weight is more appropriate based on the specific characteristics of the QCCP and its clearing members; and

(F)

i) K_CCP is the hypothetical capital requirement of the QCCP, as determined under paragraph (d)(5) of this section;

(ii) DF^pref is prefunded default fund contribution of the clearing member Enterprise to the QCCP;

(iii) DF_CCP is the QCCP's own prefunded amount that are contributed to the default waterfall and are junior or pari passu with prefunded default fund contributions of clearing members of the QCCP; and

(iv) DF_CCPCM^pref is the total prefunded default fund contributions from clearing members of the QCCP to the QCCP.

(5) Hypothetical capital requirement of a QCCP. Where a QCCP has provided its K_CCP, an Enterprise must rely on such disclosed figure instead of calculating K_CCP under this paragraph (d)(5), unless the Enterprise determines that a more conservative figure is appropriate based on the nature, structure, or characteristics of the QCCP.

(ii) For an Enterprise that is a clearing member of a QCCP with a default fund supported by funded commitments, K_CM equals:

Subscripts 1 and 2 denote the clearing members with the two largest A_Net values. For purposes of this paragraph (d), for derivatives A_Net is defined in § 1240.36(b)(2)(ii) and for repo-style transactions, A_Net means the exposure amount as defined in § 1240.39(c)(2) using the methodology in § 1240.39(c)(3);

(B) N = the number of clearing members in the QCCP;

(C) DF_CCP = the QCCP's own funds and other financial resources that would be used to cover its losses before clearing members' default fund contributions are used to cover losses;

(D) DF_CM = funded default fund contributions from all clearing members and any other clearing member contributed financial resources that are available to absorb mutualized QCCP losses;

(E) DF = DF_CCP + DF_CM (that is, the total funded default fund contribution);

(F) DF_l = average DF_l = the average funded default fund contribution from an individual clearing member;

(G) DF ′_CM = DF_CM−2 · DF_l = Σ_i DF i −2 · DF_l (that is, the funded default fund contribution from surviving clearing members assuming that two average clearing members have defaulted and their default fund contributions and initial margins have been used to absorb the resulting losses);

(H) DF ′ = DF_CCP + DF′_CM = DF−2 · DF_l (that is, the total funded default fund contributions from the QCCP and the surviving clearing members that are available to mutualize losses, assuming that two average clearing members have defaulted);

(that is, a decreasing capital factor, between 1.6 percent and 0.16 percent, applied to the excess funded default funds provided by clearing members);

(J) c₂ = 100 percent; and

(K) µ = 1.2;

(iii)

(A) For an Enterprise that is a clearing member of a QCCP with a default fund supported by unfunded commitments, K_CM equals;

Where:

(1) DF_i = the Enterprise's unfunded commitment to the default fund;

(2) DF_CM = the total of all clearing members' unfunded commitment to the default fund; and

(3) K*_CM as defined in paragraph (d)(3)(ii) of this section.

(B) For an Enterprise that is a clearing member of a QCCP with a default fund supported by unfunded commitments and is unable to calculate K_CM using the methodology described in paragraph (d)(3)(iii) of this section, K_CM equals:

Where:

(1) IM_i = the Enterprise's initial margin posted to the QCCP;

(2) IM_CM = the total of initial margin posted to the QCCP; and

(3) K*_CM as defined in paragraph (d)(3

The hypothetical capital requirement of a QCCP (K_CCP), as determined by the Enterprise, is equal to:

Where:

(i) CM_i is each clearing member of the QCCP; and

(ii) EAD_i is the exposure amount of the QCCP to each clearing member of the QCCP, as determined under paragraph (d)(6) of this section.

(6) EAD of a QCCP to a clearing member.

(i) The EAD of a QCCP to a clearing member is equal to the sum of the EAD for derivative contracts determined under paragraph (d)(6)(ii) of this section and the EAD for repo-style transactions determined under paragraph (d)(6)(iii) of this section.

(ii) With respect to any derivative contracts between the QCCP and the clearing member that are cleared transactions and any guarantees that the clearing member has provided to the QCCP with respect to performance of a clearing member client on a derivative contract, the EAD is equal to the exposure amount of the QCCP to the clearing member for all such derivative contracts and guarantees of derivative contracts calculated under SA-CCR in § 1240.36(c) (or, with respect to a QCCP located outside the United States, under a substantially identical methodology in effect in the jurisdiction) using a value of 10 business days for purposes of § 1240.36(c)(9)(iv); less the value of all collateral held by the QCCP posted by the clearing member or a client of the clearing member in connection with a derivative contract for which the clearing member has provided a guarantee to the QCCP and the amount of the prefunded default fund contribution of the clearing member to the QCCP.

(iii) With respect to any repo-style transactions between the QCCP and a clearing member that are cleared transactions, EAD is equal to:

EAD_i = max{EBRM_i−IM_i−DF_i;0}

Where:

(A) EBRM_i is the exposure amount of the QCCP to each clearing member for all repo-style transactions between the QCCP and the clearing member, as determined under § 1240.39(b)(2) and without recognition of the initial margin collateral posted by the clearing member to the QCCP with respect to the repo-style transactions or the prefunded default fund contribution of the clearing member institution to the QCCP;

(B) IM_i is the initial margin collateral posted by each clearing member to the QCCP with respect to the repo-style transactions; and

(C) DF_i is the prefunded default fund contribution of each clearing member to the

(D) QCCP that is not already deducted in paragraph (d)(6)(ii) of this section.

(iv)

Method 2. A

EAD must be calculated separately for each clearing member

Enterprise

's

risk-weighted asset amount for its default fund contribution to a QCCP, RWA_DF, equals:

RWA_DF = Min {12.5 * DF; 0.18 * TE}

Where:

(A) TE = the Enterprise's trade exposure amount to the QCCP, calculated according to paragraph (c)(2) of this section;

(B) DF = the funded portion of the Enterprise's default fund contribution to the QCCP.

(4) Total risk-weighted assets for default fund contributions. Total risk-weighted assets for default fund contributions is the sum of a clearing member Enterprise's risk-weighted assets for all of its default fund contributions to all CCPs of which the Enterprise is a clearing member.

[85 FR 82198, Dec. 17, 2020, as amended at 87 FR 14770, Mar. 16, 2022

sub-client accounts and sub-house account (i.e., for the clearing member's proprietary activities). If the clearing member's collateral and its client's collateral are held in the same default fund contribution account, then the EAD of that account is the sum of the EAD for the client-related transactions within the account and the EAD of the house-related transactions within the account. For purposes of determining such EADs, the independent collateral of the clearing member and its client must be allocated in proportion to the respective total amount of independent collateral posted by the clearing member to the QCCP.

(v) If any account or sub-account contains both derivative contracts and repo-style transactions, the EAD of that account is the sum of the EAD for the derivative contracts within the account and the EAD of the repo-style transactions within the account. If independent collateral is held for an account containing both derivative contracts and repo-style transactions, then such collateral must be allocated to the derivative contracts and repo-style transactions in proportion to the respective product specific exposure amounts, calculated, excluding the effects of collateral, according to § 1240.39(b) for repo-style transactions and to § 1240.36(c)(5) for derivative contracts.

[88 FR 83481, Nov. 30, 2023]